Thai Beverage - RHB Invest 2018-08-16: Anchoring For Future Growth

Thai Beverage - Anchoring For Future Growth

3QFY18 PATMI of THB6bn was below our as well as consensus’ estimates, as the World Cup failed to boost alcohol consumption in Thailand. We believe the market has priced in the softening of demand in the near term.

Medium-term, we still like the company for its leading market share in key emerging ASEAN countries. We believe Thai Beverage is a company with strong brand equity, which still holds deep value in the long run.

Alcohol consumption was weaker than expected.

~ SGinvestors.io ~ Where SG investors share

We continue to see shrinking alcohol demand in 3QFY18 (Sep) in Thailand, on the back of weak rural income. Even the spirit segment, which was thought to be more resilient, saw a 8% decline in volumes in the domestic market.

Khun Prapakon Thongtheppairot, CEO of the Spirit Product Group, said during the analyst briefing that the white spirit category was more resilient vs brown spirit in 3QFY18, because of its low price points amid declining disposable income in rural areas. Similarly, beer sales saw a 9% decline in volumes in Thailand.

High SG&A expenses to stay.

During the analyst briefing, there were many questions as to whether management should bring down selling, general and administrative expenses (SG&A) in an environment of waning alcohol demand. Management shared that Thai Beverage would maintain a similar level of spending over the next few quarters to sustain its brand equity. In particular, competitors like Boon Rawd and Heineken in the beer segment continue to ramp up their efforts to woo trade agents and consumers. As such, the company could not relax its advertising and promotional activities, it added.

Management attributed the weak results to low disposable income in the rural areas, due to weaker agricultural prices, though the group maintained its market share in both the spirit and beer segments.

Moving into FY19, Thailand’s general election is set to be held latest by Apr 2019. We believe the election campaigns, which should start early next year, could help to boost sentiment and consumption. Thailand has also been experiencing high GDP growth led by tourism and exports. We expect to see a trickle-down effect to consumers in 2019.

Maintain BUY.

We cut our FY18-20F earnings by 13-14% on the back of the earnings miss and softer near-term demand. This lowers our SOP-derived Target Price to SGD0.88. However, we are still positive on the medium term – please see our previous report, Thai Beverage: Bright Long Term Prospects (12 Jul 2018)).

We believe there is deep value in the longer run as other alcohol players are trading at 27x FY19F P/E (vs Thai Beverage’s 16.6x).

Near-term, better sentiment due to campaigns for the upcoming elections or improved agricultural prices would be positive drivers for alcohol consumption.

Key risks include slower-than-expected recovery in consumption and intensifying competition.

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